GBP Rallies Despite Fitch Credit Downgrade

UK Under Pressure

In the latest development to highlight the severity of the economic damage being caused by the ongoing coronavirus outbreak, rating agency Fitch has downgraded the UK’s credit rating from AA to AA-.

This is the latest in a series of downgrades from Fitch over recent years. It started in 2016 when the UK was downgraded to AA. This came following the unexpected Brexit referendum result. In February 2019, Fitch then put the UK on negative watch. This was due to the economic damage caused by Brexit uncertainty as negotiations stumbled on.

Fitch Was Concerned Before Coronavirus Crisis

Given the sharp repercussions from the coronavirus outbreak, the announcement by Fitch won’t come as too much of a surprise to many. What is interesting though are the reasons they include. Much of the commentary released with the decision refers to the damage from coronavirus. However, Fitch also highlights pre-coronavirus weaknesses in the UK economy as the main factors which fuelled a change in outlook.

Fitch noted that “timely and targeted” policies to counter the crisis were appropriate. Here they are referring to BOE rate cuts and QE. However, Fitch expressed concern over the UK government’s handling of the situation. He is referring specifically to the widening of the budget deficit. Fitch notes that it is not convinced that once the crisis passes, the government will be able to shrink the deficit and new debt accrued.

Trade Talks Creating Uncertainty

On the other hand, Fitch did note that some increases in investment spending could be beneficial for productivity and growth. Despite some positive signs, however, Fitch’s outlook was mostly bleak with the agency also notes the negative impact of trade deal uncertainty. With EU/UK trade talks side-lined while the UK and EU leaders combat the coronavirus crisis, there is a growing fear that the UK will walk away from talks at year-end without a deal being achieved. The UK PM is so far yet to change his position on his refusal to extend the deadline for the talks.

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